Small Cap Value Report (Tue 18 September 2018) - CNKS, JDG, ESC, FLO, TUNE CLIG,

Tuesday, Sep 18 2018 by

Good morning!

There's a huge supply of announcements today. I have a dental appointment this afternoon but will come back and write a little more afterwards.

The list ended like this:

Sorry for not getting around to Cloudcall (LON:CALL), but I think Paul is the expert in this share. He will be back later in the week. Perhaps he will have a chance to review it for us then.



Cenkos Securities (LON:CNKS)

  • Share price: 92p (-7%)
  • No. of shares: 55 million
  • Market cap: £51 million

Interim Results

A few words on this Nomad/broker as it is one I have some familiarity with.

These are very poor results as profits have collapsed almost to nothing (£0.3 million).

But it is still profitable, although only just.

What I find impressive about Cenkos is that it has never made a loss  in 13 years of history as public company.

This is due to compensation plans which very heavily reward results, and then are flexible to dry up when results deteriorate.

For example, in this H1 period, revenues collapsed by 38%. It's not a stretch to imagine that most businesses would suffer a loss if their revenues fell by 38% compared to the prior period.

Demonstrating the flexibility of employee pay, staff costs also fell in the period, by 32.5%. The banker bonuses were significantly reduced.

Drilling into the revenue streams, I see that every single one of Cenkos' activities saw reduced sales this period.

The largest revenue stream also saw the largest percentage fall: corporate finance fees are down 44%. This is a feast-and-famine type of business. It heavily depends on market conditions and on the earning power of the company's top investment bankers.

Nomad/broking fees were about flat, research fees were down 12% thanks to MiFID II, and execution fees were down 43% due to exceptional gains made last year.

Like most investment banks, the research and execution…

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All my own views. I am not regulated by the FSA. No advice.

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Cenkos Securities plc (Cenkos) is a United Kingdom-based independent institutional securities company. The Company's principal activity is institutional stockbroking. Cenkos provides corporate finance, corporate broking, research and execution securities services to small and mid-cap growth companies, and other companies, across a range of industry sectors, as well as investment funds. The Company offers its clients access to equity finance at various stages of their development. The Company's activities also include institutional equities and market making. It provides technical advice on all forms of corporate transactions, including initial public offerings (IPOs), fundraisings, mergers and acquisitions, disposals, restructurings and tender offers. The Company's subsidiaries include Cenkos Nominee UK Limited, Cenkos Securities (Trustees) Limited and Cenkos Securities Asia Pte Limited. more »

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Judges Scientific plc is a United Kingdom-based company, which is engaged in the acquisition and development of a portfolio of scientific instrument businesses. The Company's activities are predominantly in or in support of the design and manufacture of scientific instruments. Its segments include Materials Sciences and Vacuum. Its subsidiaries include Armfield Limited, engaged in the design and marketing of engineering equipment and research instruments; Fire Testing Technology Limited, which is engaged in the design, manufacture and service of instruments that measure the reaction of various materials to fire; Scientifica Limited, which offers micropositioning equipment, microscopes and advanced imaging systems used in electrophysiology and neuroscience; Quorum Technologies Limited, which manufactures scientific instruments primarily used for electron microscopy sample preparation, and Sircal Instruments (UK) Limited, which designs, manufactures and distributes rare gas purifiers. more »

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Escape Hunt PLC, formerly Dorcaster Plc, is a provider of escapes the room experiences. The Company’s escape room is a physical adventures game in which players are locked in a themed room and have to find clues and solve puzzles in order to escape against a countdown clock. Its games typically require players to solve a crime story or mystery, which has been tailored to the location of the branch, within 60 minutes. It operates in approximately 50 cities and 30 countries worldwide. The Company also offers its own brand of indoor and outdoor entertainment from Sydney to Singapore, Bangkok to Brussels. more »

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  Is LON:CNKS fundamentally strong or weak? Find out More »

67 Comments on this Article show/hide all

cholertonandrew 18th Sep '18 48 of 67

In reply to post #399604

Thanks that’s a very good post. Their webinar this morning was very useful. I think the business case still stacks up but I wouldn’t want to bet against them needing to raise more cash. I’m still holding.


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cholertonandrew 18th Sep '18 49 of 67

Sorry- the above relates to Cloudcall.

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Graham Neary 18th Sep '18 50 of 67

In reply to post #399504

Thanks for that Luthrin. That would have been an easy mistake re: Flowtech Fluidpower (LON:FLO). G

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Gromley 18th Sep '18 51 of 67

In reply to post #399619

Thanks David, for a very useful view on the merits of Bango (LON:BGO).

I should stress again though that for me this is not a “conviction short” (I don’t do those anymore); but rather a small position in a broad (and broadening) portfolio of shorts on stocks which the factors suggest will on average under-perform.

I have little doubt that some of the stocks on which I am currently short will go on to be stars, but my strategy here is essentially predicated on (1) those being a very small proportion and (2) getting out of the stars early on in their stratospheric rise. Time will be the judge of that!

No disrespect intended whatsoever, but I would wager that holders of other stocks of which I’m short could put together similar arguments about why now is not the time to be short these stocks. Some of those arguments will be right and at the right time, others will not.

Whilst I am somewhat less “strategically ignorant” of many of these stocks than I was I don’t know the fine detail of what Bango do, so some or all of the following may be utter tosh.

You are quite right to point out that the reason for the delay in EBITDA profitability of the whole group is down to the acquisition of the “data monetisation” business. I now also understand this is the reason for the lower ratio of revenue to EUS as they are now charging less for transactions in order to acquire more customer data to monetise.

I would just say that this looks like a change of goal from making a profitable transactions business, which they have actually now achieved (at least at the EBITDA level) to deriving profits from “monetisation of customer data”, which as I understand it is not yet profitable.

This may well raise the potential upside, but I do have to at least question how sure they can be of delivering the jam from this business. I understand that a number of their customer (Facebook, Netflix etc.) are already really quite good at understanding their customers quite intimately. There is surely an element of risk in this change of focus?

I have also read, elsewhere, suggestions that other technology (“the blockchain”) may render Bango’s offering redundant. If you follow Bango you probably know where I am referring to, if you don’t I really wouldn’t bother trying to track it down! I don’t necessarily give this too much credence but neither would I totally dismiss it with my limited knowledge.

It is a useful reminder that not only do Bango need to reach profitability, they really need a decent period as a cash-cow in order to earn-back all of their investment. 

I am also reminded that about thirty years ago I was working on a service that allowed telephone bills to be used as a charging mechanism for other products and services, and, had we thought about it at the time, I could have provided some pretty decent “monetizable” customer data. 

Obviously, the tech. back then wasn’t quite to the standard to deliver all of the potential, nor were telcos particularly keen on the idea of moving into “banking”, nevertheless it achieved many of its goals. With the offerings of the likes of Bango and Boku things have no doubt moved on a lot – but it has been thirty years!

So, whilst I absolutely accept the risks of being short here, I still think it sits comfortably within my approach of a broad portfolio of small positions. But, of course I will watch out for those catalysts!

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crazycoops 18th Sep '18 52 of 67

Thanks for the coverage of City of London Investment (LON:CLIG) Graham, much appreciated.

Blog: Share Knowledge
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Fegger 18th Sep '18 53 of 67

In reply to post #399689

I also thought it was a very informative writeup . The writeups on Judges Scientific and CLIG were also excellent and really added to my knowledge of 3 shares I already had researched in depth as a holder. Thanks Graham!

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DJCP 18th Sep '18 54 of 67

In reply to post #399684

@Reacher #46

Yes, I did fathom Flowtech Fluidpower (LON:FLO) figures in the end, but thanks for your confirmation :o)

This from Flowtech Fluidpower (LON:FLO) figures "Administrative expenses before separately disclosed items:" in particular wound me up ! lol
What will we get next ? "Earnings before Rent, Rates, Overheads and Restructuring" (or ERRORs for short) !

I did mention (yesterday ?) about how I wished companies would all report with the same wording and in the same format - Maybe 'Exceptionals' could be standard/limited too (to assist Graham and Paul !), so it didn't include the same un-Exceptional item(s) year after year.

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ken mitchell 18th Sep '18 55 of 67

Yes, many thanks Graham for the excellent ( and positive) update on CLIG. That 98 for quality sums it up. Also worth noting the big and growing dividend. It goes ex the next 18p dividend on 11th October, and it is paid on the 30th October.

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Hertfordshire1 18th Sep '18 56 of 67

Hi Graham,
Do you have a view on Be Heard Results today? I believe you and Paul have covered them before.

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Hertfordshire1 18th Sep '18 57 of 67

Sorry forgot ticket. Be Heard LON:BHRD

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Steves cups 18th Sep '18 58 of 67

Re Focusrite (LON:TUNE)
I believe the company has a conservative outlook on its media statements so will largely underpromise and over deliver. Be interesting to see what drops through to eps especially bearing mind the increase of over 50% in the cash.
I hold and wait for Nov 20th.
Interesting that the SP rose to 500p around 30th August and then dropped sharply back to the 450p region shortly after!!

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jonno 18th Sep '18 59 of 67

Having re-read the results and revisited the balance sheet I am still struggling to see what was so dreadful as to warrant a 30% fall in the share price. Perhaps as Graham said beware acquisitive growth unless funded by retained earnings. Anyway I have taken a smallish position and await the next update on 23rd October.

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jonno 18th Sep '18 60 of 67

Apologies forget to insert the ticker in my previous comment that refers to Flowtech Fluidpower (LON:FLO).

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Paul Scott 18th Sep '18 61 of 67

Hi Everyone,

I've been out all day today, being an agony uncle, helping one of my dearest friends back onto top form! A successful mission, I might add :-)  So my mind hasn't been on shares at all, until now.

Graham WhatsApped me during the day, asking me to comment on Cloudcall (LON:CALL) today or later, as the readers want to know what I think of the interims today. I read them very quickly, on the toilet, on my iPad, first thing today & thought everything looked fine! So I was a bit surprised when the share price fell, but who cares - a few small trades move the price of shares like this, so not a worry to me. I like it as a very high recurring revenue, very high gross margin, low churn SaaS business. Set against that, it continually disappoints wrt cash burn, fundraisings, etc. That said, in my view, a nice growth business should grow, not penny-pinch, and miss out on a big market opportunity. So all looks fine to me (I hold shares in CALL).

What else? Ah yes, Cenkos Securities (LON:CNKS) - great reporting from Graham above. I no longer hold, as got fed up with the share price sticking at 95p. Very volatile results, but it has paid out fantastic amounts in divis for the patient, often very lumpy. Low market cap for a very nice name. I may revisit in future.

Escape Rooms - gimmicks. I'm not interested. Number one rule of investing - are profits sustainable? Not so in this sector, in my view.

Eagle Eye - online vouchers. I quite like this - am keeping an eye on it. But I hoped for profits, not EBITDA losses.

I've been listening to the Alan Clark Diaries audiobook, and have found myself starting to write a bit like he spoke. Worrying indeed.

Cheese, Paul.

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stevenhume 19th Sep '18 62 of 67

In reply to post #399564

Re Flowtech (LON:FLO), the 30% drop seems over done, unless there is more to it than meets the eye. The contract with the issue was only for 1.5m which is a small percentage of overall income although some costs will have been incurred for possibly no return. Longer term the challenge will be to integrate the acquisitions. They are currently implementing Sage financials across the group so one must wonder about the state of their main operational systems. Clearly a challenge for the new management team. I have topped up - catching a falling knife springs to mind.

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davidjhill 19th Sep '18 63 of 67

In reply to post #399714

Thanks Gromley

All makes sense as part of a broad based portfolio short strategy, where you accept that some will rise and you exit those quickly.
My point was really that the risk/reward is not favourable for a conviction/stand alone short of size. Ocado was a classic example of major short term catalysts burning shorts heavily, irrespective of whether (as I happen to) you think it is ridiculously overvalued.

I am personally long of Bango (LON:BGO) mainly because I think the payments space is interesting and also that they are not overvalued assuming the core tenets of their story are true : i.e. can handle $5bn of EUS with no additional ramp up of cost and the $4bn EUS pipeline is high probability.

I do however, mull over the whole blockchain competition threat to this type of cash business. Whilst I suspect there is some ultimate plausibility my suspicion is that we are some years off any mainstream adoption of it. The market will only really react to this negatively on the share price 6-12 months in advance of heavy adoption, so will keep an eye open for signs.

The data business is a bonus in my opinion, but potentially a very big one. It will break even this year at which point it is effectively a free option. In current market conditions those businesses are ascribed a lot of value but I haven't baked anything into my numbers for it. Might be the cherry on the cake though so I am happy to live with a marginally lower profitability for a year to buy the optionality.

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tomps3 19th Sep '18 64 of 67

Here's the Judges Scientific (LON:JDG) H1 presentation given by CEO David Cicurel and CFO Brad Ormsby to analysts & investors on the morning of results (18.9.18).

Management continue to do what they're very good at. The anticipate fy results ahead of expectations.

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jonthetourist 19th Sep '18 65 of 67

In reply to post #399574

I think Crystal Amber are already pushing for a Cenkos deal, according to their recent annual report.


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JTG 19th Sep '18 66 of 67

Thanks for the City of London Investment (LON:CLIG) write-up, Graham. As a recent buyer, much appreciated, but then, perhaps because my you're echoing why I bought! Must beware of confirmation bias, but I think this is one to forget about and hold long-term. I think 14% return compound p.a. over 12 years is as high I would dream.

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Bitofathickie 20th Sep '18 67 of 67

In reply to post #399959


many thanks for the Judges Scientific (LON:JDG) video.

He does make a bit of a faux pas at 51:30 when discussing the possibility of centralising R&D. He basically slags off similar company Elektron, who centralised, saying their market cap fell from £50m to £5M as a result.

If it is this company he's talking about Elektron Technology (LON:EKT) then he is well out of date. Their shares are a 5-bagger in the last year and now at market cap £80m+. Their investment in R&D seems to have paid off handsomely.

However, the figures and prospects look good and I like the commitment to 10%+ divi growth so I bought.

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 Are LON:CNKS's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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